Halliburton Reports Strong First Quarter

Halliburton’s first-quarter reported results were quite strong. Given the seasonally strong demand for software last quarter, sequential comparisons were weak, but year-over-year comparisons were good. Revenue was $7.0 billion versus $6.9 billion last year, as international revenue increased 21% over the same time frame, easily besting Schlumberger’s and Baker Hughes’ performances. In particular, Middle East/Asia revenue increased 25% from last year’s levels, led by growth in the Australia, China, and Saudi Arabia markets.

International growth in 2013 is expected to be in the low teens, which is again stronger than Schlumberger’s approximate 10%-11% guidance and Baker Hughes’ 7% growth. Halliburton’s positioning within deep-water is very beneficial, as well as its expertise in pressure pumping as it expands overseas. Halliburton’s North American performance was mixed, as revenue declined 11% from last year’s levels (worse than Schlumberger’s 4%), but operating margins expanded almost 400 basis points to 16.3% sequentially, as the firm benefited from lower guar costs, increased customer activity (shifts to pad drilling and more 24-hour operations), cost efficiencies, and higher service intensity. The margin performance was again best-in-class versus its two closest peers.

Halliburton also announced that it would take a $1 billion Macondo charge, bringing its total reserves to $1.3 billion. Unlike Transocean, which has been unable to take advantage of any tax savings to date, Halliburton has taken a total after-tax charge of $828 million, which is a $472 million reduction. Halliburton is incorporated in the United States (Delaware specifically) while Transocean is incorporated in Switzerland, which may account for the tax differences. Insurance recoveries are also possible Halliburton is in advanced negotiations for a settlement, with both stock and cash components on the table, and a cash payment that takes place over an extended period of time. We note Halliburton has over $2 billion in cash on hand, and a 50/50 settlement would require $650 million worth of stock, or 17 million shares, which is less than 2% dilution.

The anticipated size of the settlement is larger than we had thought, and similar in size to Transocean’s $1.4 billion settlement, despite Halliburton’s reduced role and contribution (in our view) to causing Macondo. However, Transocean has also lost several rig contracts because of downtime issues due to higher levels of operator scrutiny post Macondo among other items, which the firm estimates pushes its total Macondo impact on the firm to over $4 billion. In contrast, Halliburton has generally gained share in the deep-water Gulf of Mexico post Macondo, as tougher levels of operator scrutiny around services work made operators more likely to rely on established services providers.